How credit scores predict driving ability

Insurers say those with poor credit scores are riskier behind the wheel

By

AnnaMariaAndriotis

Martin Novak / Shutterstock.com

You may be the safest driver out there but a low credit score can get you the same policy price as if you just crashed a car.

It’s no secret that being a menace on the road will lead to sky-high car insurance premiums. But a new study reveals that even the safest drivers—those with no history of accidents or other car incidents—are charged significantly higher premiums when they have a low credit score. A report released on Wednesday by the Consumer Federation of America found that major insurers Allstate and State Farm charge 39% and 127% more, respectively, for drivers who have poor credit scores compared with those who have top scores.

The study focused on a 30-year-old female driver with a clean driving record who was applying for minimum coverage. The average annual premium in nine major U.S. cities for this driver ranges from $563 if she has excellent credit, to $755 if she has average credit, and $1,277 if she has poor credit with State Farm, according to the study. With Allstate, those figures are $948, $1,078, and $1,318, respectively.

The findings underscore the far-reaching impact of a low credit score. Most consumers associate a low score with difficulty getting approved for loans or getting loans at a low interest rate. While that’s true, a low credit score also wreaks havoc on other aspects of their everyday life, including difficulty renting an apartment or even getting a job. Poor credit, as the study points out, also makes car insurance policies costlier even if the policyholder is a safe driver.

Critics question whether using scores to determine car insurance premiums is a fair practice. Credit scores were originally created to help lenders predict whether a loan applicant was likely to pay back a loan. Once they give out a loan, there’s no way to take that funding back, even if the borrower stops paying. In contrast, car insurers can drop policyholders if they don’t make their insurance payments.

Separately, credit reports do not contain information about whether consumers are on time or have missed insurance payments, says John Ulzheimer, consumer credit expert with CreditSesame.com, a credit management site, and a former manager at FICO, which is the credit score used for most consumer lending decisions. (The information in credit reports determines credit scores.)

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But the insurance industry says that low credit scores are an indicator of bad drivers. “There is an undeniable correlation between credit information and insurance risk,” says Rachael Risinger, a spokeswoman for State Farm. Allstate did not respond to requests for comment. Bob Hartwig, president of the Insurance Information Institute, which represents insurers, says that individuals who are irresponsible with their debts are also likely to be irresponsible with how they drive and to have a higher frequency of accidents. He says that scoring is one of many factors that’s used to determine a policyholder’s premium.

Consumers have little protection against this practice that has been used by insurers for many years. Three states—California, Hawaii and Massachusetts—prohibit car insurers from using credit scores when pricing policies, but the practice is legal in all other states. Drivers don’t need to give their approval for an insurer to pull up their score, experts say; filling out an application for insurance gives the companies the legal right to get drivers’ scores.

Complicating matters, drivers who want to know where their credit stands in the eyes of insurers before they apply won’t be able to figure this out easily (if at all). Insurers rely on “insurance scores” and can refer to one of at least two different types of scores. That includes FICO scores that pull information from a driver’s credit reports that’s designed to predict insurance risk. Consumers cannot buy these scores, says Ulzheimer. Insurers can also use “Attract” scores, which are provided by LexisNexis, and are based off of information such as credit reports and claim history. Consumers can buy a report with their score for $12.95. Drivers may also be able to access a seven-year claims-history report for free once every 12 months at LexisNexis.

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